By Jill Luoto, Craig McIntosh and Bruce Wydick, published by the University of Chicago Press, January 2007, 42 pages, available on the Microfinance Gateway at http://www.microfinancegateway.org/content/article/detail/41758
The paper written by Jill Luoto, Craig McIntosh and Bruce Wydick explores the impact of credit information systems on microfinance institutions (MFIs) in developing economies. It is divided into five sections and presents data that attempts to measure the effect of a credit information system on a Guatemalan MFI.
The first section of the paper introduces microfinance and explains that with its growth, greater lender competition has emerged. Increased competition among lenders consequently reduces loan repayment incentive for borrowers thus increasing MFI arrears and increasing borrower over-indebtedness. Since lenders are unaware of existing borrower debts or delinquencies with other institutions, an imbalance of information occurs. The asymmetry of information diminishes a lender’s ability to determine which borrowers are most likely to repay and which are likely to default. By introducing a credit information system, information between borrowers and lenders is better balanced.
The next section of the paper further evaluates the existence, theory and evidence of credit information systems. The authors indicate credit information systems vary between countries and continents. Africa has the least developed credit information systems. Asian economies are experiencing a growth in credit information systems and Latin America has the most extensive coverage of developing economies. In practice, the credit information systems create a screening effect that allows lenders to better assess borrower risk. Lenders are able to create and maintain a higher quality loan portfolio. Credit information systems also have an incentive effect for borrowers to repay. If the borrower knows that by not repaying one MFI, they will be denied credit from other MFIs, they are more likely to repay.
In section three, the authors introduce their empirical work. They aim to examine the impact of CREDIREF, a microfinance credit bureau in Guatemala, on Génesis Impresarial, a large-scale MFI with 40 branches. CREDIREF manages both positive and negative payment information on borrowers and Génesis Impresarial uses the credit information to make on average 1,504 bureau observations per month during the authors’ review period. The empirical work measures loan delinquency as the percentage of loans in a branch that were late as of the last payment made. The authors also examine three additional outcomes: the percentage of loans in a branch/month on which a payment is ever late; the average number of late payments per loan in a branch/month; and the average number of months late for loans issued in a branch/month that become delinquent.
Section four contains the results from the empirical work. The strongest result is a large decrease in the average number of missed payments. The use of CREDIREF decreases the percentage of loans on which any payments are missed by 3.3% and the number of missed payments by 1.3. The implementation of CREDIREF caused a drop in the percentage of clients missing a payment and the effect increased over time. The authors estimate the drop in the percentage of clients missing payments is 4.5% plus an additional 0.3% per month the system is used. The fixed effect estimation for decrease in borrower default was shown to be 1.92%. After factoring in the cost of the CREDIREF implementation, the authors estimate Génesis Impresarial’s internal rate of return at 96.5%
Finally, in section five, the authors provide their conclusions and policy implications. They conclude CREDIREF had a strong impact on decreasing the occurrence of missed payments at Génesis Impresarial. However, the authors indicate evidence for the impact of CREDIREF on delinquency is mixed. Regardless, they assert credit information systems aid in the efficiency of financial systems by promoting transparency in lending. As the demand for credit grows in developing economies and as the services of MFIs begin to overlap, credit information systems will become important to the sustainability of the market.
-Steven Craig
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